BCCC cautiously optimistic over impact on FDI of new Anti-Monopoly Law

Issue 21 By Liu Ying, China IP,[Anti-Monopoly]

Since foreign companies have paid much attention to the AML, China IP journalists also interviewed Mr. Raymond Moroney on November 14, 2007, a major intellectual property consultant to the British Chamber of Commerce (“BCC”) in Beijing. As Mr. Moroney sees it, foreign companies are most concerned that the provision on the abuse of IPR will be implemented in such a way as to favor domestic companies over foreign ones. However, Mr. Moroney himself is optimistic that such concern among members of the BCC in China will subside over time.

China IP: Article 55 of the Anti-Monopoly Law of China states that “…this law shall apply to the activities of undertakings which abuse their intellectual property rights and engage in activities that eliminate or restrict competition.” What’s your definition of “abuse of IPR”? What kind of conduct may be recognized as “eliminating market competition”?

Mr. Moroney: Firstly, on behalf of the membership of the British Chamber of Commerce (BCCC) and the European Chamber of Commerce China (EUCCC) I would like to take this opportunity of welcoming this new piece of important legislation. With reference to your particular question, foreign rights owners are awaiting further clarification on this point and will probably adopt a “wait and see” approach pending the issuing of the Implementing Regulations as to the full implications of the new law, after which we will be in a better position to answer these questions.

In preparing for this interview I came across an interesting study conducted by a Tongji University PHD student, Professor Zhang Weijun , 1who has done some research on this particular issue. In that study, Prof Zhang attempts to flesh out some of these by referring to definitions in sources such as the US Anti-Trust legislation where “misuse of IP rights” is referred to. In his study he makes references to precedents in US common law and equity law which cite attempts made by rights owners to extend the term of a particular IPR (i.e. copyright) for example, as a possible “ misuse of IP law”. With respect to European law, we can look to a number of further sources most of which deal with the abuses in the context of “anti-competitive behavior”, some of which practices are also illustrated in Professor Zhang’s study. One can also look to provisions within the Trips Agreement, whereby member countries (including China) are required (having acceded to the WTO) to incorporate into their national laws some key principles regarding the protection of IPR. Notwithstanding that fact (in the context of the new Anti-Monopoly Law) in theory sovereign governments have the ability to legislate appropriate measures to resolve practices (i.e. such as an “act of abuse of IP rights”) where the effect of such act(s) (once they meet the required criteria set out in the relevant Competition/Anti-Trust legislation) unreasonably restrains trade or competition.

As regards what may constitute conduct “eliminating market competition” one can look to Article 82(B) of the Treaty of Rome, which sets out three main conditions to determine abuse of a dominant position in a particular market.

As you are aware, there are a lot of foreign companies investing in China. Many of these companies and their legal advisers recognize that some of the recently enacted laws in China (particularly in relation to IPR protection and investment) are good for business and progressive, when compared to similar laws in other countries. It is noted that in recent years China has taken the unique step of consulting with and seeking comments from the business community there on some of its new draft laws. Why? I would surmise that the Chinese government wishes to avail and benefit from the experience of other jurisdictions on the implementation of this type of law for example, to ensure the medium to long term competitiveness of its economy in light of international best practices. Using the example of IPR protection, what foreign rights holders are most concerned about in the context of this new law is not so much the content of the law itself, but how the government will apply and enforce this law.

China IP: The issuance of the Anti-Monopoly Law will trigger revisions to a series of IP laws and regulations. In what way do you hope the revisions will be done? In your opinion, what are the principles behind the revisions?

Mr. Moroney: If we have a look at current draft IP laws, most of the laws are being finalized following feedback received from various domestic and foreign stakeholders in China, such as AmCham, EUCCC, etc. So I would not be surprised if legislators will take into account the changes proposed in those laws in the context of those provisions envisaged by the Anti-Monopoly Law to keep them consistent. For instance, the proposed amendments to the Trademark Law are primarily aimed at procedural efficiency, such as reducing the time for the filing a trademark, and TM oppositions, and so on. In relation to the Patent Law, we see that the Chinese government has placed a clear emphasis on the need for greater Chinese innovation, such as the introduction of a controversial requirement whereby any patents developed in China (whether partly or otherwise) need to be filed with SIPO first, before any applications related to the same patent are made overseas.

When asked to comment, BCCC members have expressed some concerns over how IPR can be adequately enforced and protected by the new law where Article 55, for example, does not appear to clearly define “IPR abuse”, thereby leaving it open to interpretation. To borrow from some comments on the law made by the EUCCC does this omission mean that an act deemed to be an “abuse of an IPR” is itself a breach of the law, or must the abuse first be determined to be a monopolistic conduct (as defined elsewhere in the law?) or an abuse of a “dominant market position”? Such lack of precision gives rise to the risk of misinterpretation of the law and consequently raises concerns for foreign investors as to how this new law will be implemented and complied with.

In this regard, I will refer to some further comments made by the EUCCC in relation to the last draft Anti-Monopoly Law for some guidance. On that occasion it was suggested the insertion of certain wording, might allay a lot of the fears expressed by rights owners on the possible impact on them of the new law. It was suggested that the inclusion (in the latter part of Article 55) of the existing terminology of the yet to be defined “abuse of IP rights” be substituted and amended to read as follows “…this law is applicable to the monopolistic conduct or abuse of a dominant market position of undertakings to eliminate or restrict market competition by abusing intellectual property rights..” or similar wording to that effect. This is what we are guessing was the main purpose of this provision, although this has yet to be clarified. 

China IP: There is no clear stipulation as to the establishment of law enforcement organizations in the Anti-Monopoly Law. What is your point of view? Which way is more efficient, to set up a unified law enforcement organization, or to keep the current situation where several administrative organizations enforce the law respectively?

Mr. Moroney: As indicated at the introduction, the business community at large will adopt a “wait and see” approach before they are in a position to give a proper assessment on the impact of the new law, as far as continued foreign investment into China is concerned. In this regard we await the content of the new Implementing Regulations to clarify certain important issues. Are there going to be specific enforcement authorities dealing with specific industries under the new law, or will there just be one specific enforcement authority that will have sufficient statutory power to monitor and take action against any industry or company found to be in breach (regardless of the sector) in a way that will avoid conflict with existing Chinese laws? It is probably too early to say at this point and we will have to await the practice which will develop after the law becomes effective next year.

With reference to some earlier comments canvassed by the Chinese government in relation to the final draft Anti-Monopoly law (before it was promulgated) the EUCCC when referring to Articles 9 and 10 of the 1st draft law, suggested that “the Anti-Monopoly Commission (AMC) [referred to in the new law as the “Anti Monopoly Committee”] will perform a legislative and research function only, and should not be responsible for enforcement” and that the areas of responsibility between the roles of the Anti-Monopoly Committee (AMC) and its enforcement body, the Anti-Monopoly Law Enforcement Agency (ALEA) be clearly defined, to make it easier for companies to comply with the law, by only having to deal with just one administrative authority, as opposed to many,” which they believe would simply prove unworkable.

To borrow from the European experience, there is usually one independent authority with the requisite amount of statutory power (in each European member state) responsible for the implementation of EU competition law (where that EU law has been ratified in the relevant member state). Such bodies are responsible for investigation and enforcement of alleged abuses. This mechanism has over the years proved to work well in practice, and could be used as a reference as to why one should choose a unified independent agency with sufficient statutory power to undertake its mandate in that market. The recent (European Court of Justice (ECJ) decision in the alleged abuse by Microsoft of its dominant position in the software market, being a case in point as to how this type of law can work in practice.

Currently, as I understand it, NDRC (National Development and Reform Commission), MOFCOM (Ministry of Commerce) and SAIC (State Administration for Industry and Commerce) all have separate and distinct roles regulating monopolistic activities in China. We have seen over the years how this framework has resulted in challenges to streamlining economic development and efficiency as a result of various competing laws and overlapping mandates to take corrective administrative action, which experience we can learn from. The BCCC strongly believes and supports any initiative which seeks to stream line the market system in order to reduce the level of bureaucracy. Such measures should act (together with other laws) to promote economic growth, as well as improve transparency and efficiency in the market.

China IP: What are the multinational companies worried about?

Mr. Moroney: It is felt that most of the concerns regarding Article 55 relate to a perception among foreign investors that the new provision could be implemented in such a way as to favor domestic companies over foreign ones. I am reasonably optimistic that any such fears among BCCC members will subside over time. It is my hope that legislators (in the drafting of this provision) have attempted to strike a delicate balance between the need to encourage domestic innovation, while at the same time recognizing that foreign investment and technology are likewise important factors in China’s innovation drive.

In the long term, it is ultimately in the interest of Chinese companies, to nurture and invest in their own R&D (rather than succumb to the practice of a minority of unscrupulous companies who seek to generate short terms gains by exploiting the intellectual property rights of others); so as to reduce the possibility of damage to their brand as a result of potential IP disputes. On the other hand, it is equally important for China that new technologies being imported are not “abused” or monopolized (i.e. with reference to the three conditions set out under EU competition law as to what constitutes abuse of a dominant position) to such a degree that they create industrial standards which are beyond the ability of Chinese companies to license. It would be much preferable that those same companies were in a position to benefit from such technologies.

Foreign companies, if given the choice, are prepared to make significant R&D investment in China; and where possible, file patents in China first (where such decisions make commercial sense) in which case they should be encouraged to do so. On the other hand, such companies should not be penalized if they choose not to file patents in China first; as such measures would result in an erosion of confidence in the system and ultimately discourage further investment. Assuming China is prepared to adopt a “level playing field” approach to the market (for both foreign and domestic investment) this should facilitate the importation of a greater amount of R&D and cutting edge technology into China over the medium to long term, provided this is done in an environment where their IPR is respected.

My own personal view is that common sense will prevail and that the Chinese government is genuinely trying to balance the various rights that come into play. On the one hand, they seek to placate and take into account their responsibilities to Chinese employers and consumers alike; and on the other hand, to remind foreign investors that China is a safe place to do business, as far as implementation of any new law is concerned.

In order to prepare for this new law, I would echo comments made by Michael Zhang & William Zheng in their recent Article (which was published in the October edition of China Law & Practice) in which they suggested that both foreign invested companies (and domestic companies alike) need to start commencing their own internal reviews of existing policies (i.e. such as pricing and to consider perhaps how they exploit their IPR in China) to establish if they are in compliance with the new legislation, and take any necessary steps to rectify such practices where necessary, before the new law becomes effective on August 1st 2008.

I believe the economic outlook remains positive for the Chinese economy as it is clear that many multinational companies continue to engage in large-scale research and development projects and investment here. I am optimistic that if the Chinese government shows its seriousness about continuing to improve and safeguard IPR, that more companies will be encouraged to file their patents in China first, and facilitate further technology transfer into the country, so long as they understand that (as is the case in Europe and the US) those same companies will be restricted from using their market position to limit competition

In fact the new law (as suggested in the above China Law & Practice article)may even present an opportunity for foreign companies to enter natural monopolized industries, that were previously restricted, because of certain exceptions given in the law for a “natural monopoly” in less sensitive industries such as basic telecoms, mineral exploration and transportation” .

China IP: The government has to balance between the issuance of the competition law and IP rights protection. Sometimes even though you exercise your IPR legally, there still may be some adverse impact on competition. How can that be resolved?

Mr. Moroney: As hinted at previously, I think the government in China is trying to create a balance. On the one hand, it needs to encourage domestic innovation, while at the same time recognizing that it needs foreign technology and investment to help the innovation drive in China. If the government makes it too restrictive for foreign investment companies to do business here, these companies may look to invest in less risky and more predictable markets, which would undoubtedly adversely effect China’s economic development. My personal view is that it is probably not the case.

In reading the content of Art.55, I would guess that the main fear the Chinese government has with regard to an unregulated market, is the possibility that unscrupulous foreign rights owners could seek opportunities in this market which may result in the development of IP portfolios that automatically drive local standards, for example, for specific technologies beyond the reach of local Chinese companies. That is why there appears to be a determined effort by the Chinese government in its recent pronouncements to try and develop domestic innovation and to support the development of local domestic standards. While this is understandable from a national perspective, such policies need to be tempered with caution to avoid any adverse consequences to investment whereby such policies are perceived to benefit local industry at the expense of foreign investment.

The recent IP disputes involving DVD and CD manufacturers are a case in point. Such confrontations have only sought to increase international tensions with China’s major trading partners (which is something I believe the current leadership is seeking to avoid if at all possible). If the government is successful, and continues to strive to improve dialogue with their major trading partners, such efforts will be rewarded and the economy should continue to prosper well into the future. 

In the US and Europe a lot of research and analysis has been undertaken over the years on the impact of the exploitation of IPR on free competition in the market. There are a number of references that outline some of the circumstances where exploitation of IP rights may be considered an “abuse”.

The reality today is that technology-driven companies, such as Intel and Dell, are making huge investments in China at the moment and are expected to continue to do so. They are adopting a long term view and believe that the economic environment is such that it will not restrict their activities or ability to conduct business here, where such a presence does not conflict with or undermine the Chinese economy (i.e. as a result of anti-competitive behavior for example). At the same time, they also realize that they are prepared to continue to bring their core technologies to China and will continue to share and/or license them to Chinese domestic companies, as long as practical measures are taken to improve the IPR protection environment for all. Such a policy, once implemented, has proved in other markets to be a basis for sustained growth for innovation into the future, albeit that may create potential future local competitors.

Only time will tell whether such a harmonious ideal will come to a reality. I think foreign investors are mature enough to understand that where their investment does not prove detrimental to the growth of domestic competitors in any market where they are allowed to compete with them on a level playing field, then such a reality should facilitate greater access to innovation and technology, which will in turn promote their long term development, and allow domestic companies to compete both at home and abroad, as we can see with companies such as Haier, ZDT and Huawei.

1.published on the Munich Intellectual Property Law Center (MIPLC) website http://www.miplc.de/research/general_projects/completed_projects/zhang_abuse/

About the author:
    Raymond Moroney is an Irish and UK qualified lawyer, and works at the Beijing office of Rouse & Co. International, an Intellectual Property Specialist Consultancy. Raymond is an acting Vice Chairman of the IPR Working Group of the European Chamber of Commerce (EUCCC) in Beijing.


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